No More Middle Class?

I came across this article the other day, and the stats are a eye-opening.

Click here to view the article.

The numbers do not lie.

1. Almost 1/2 of all Americans have less than $10,000 saved for retirement.


2. 83% of all US Stocks are in the hands of the wealthiest 1% of American people.


3. For the 1st time EVER, Banks own more residential homes than all other Americans put together.
   


4. Over 1 in 5 Children are living below the poverty level, the highest level in 20 years!


5. Only the top 5% of households have earned enough additional income since 1975 to stay in line with housing costs.

This article points out a few more interesting statistics about the struggle of the middle class, which is slowly fading.  As a 28 year old, I am more worried about retirement.  Will Social Security be around for my generation?  How much will I have to earn, and save, in order to retire comfortably?  Pension funds, will these completely die out by the time I retire?

I've seen a lot of news articles lately discussing Government spending, the deficits, and drastic cuts that are just around the corner.  Some of these cuts include the following:

1. Raising the retirement age required to draw off Social Security.  By the time my generation retires, will the new retirement age be 85?


2. Drastically reduce personnel costs in the government, specifically the military, such as charging veterans more for medical benefits and cutting retirements.  Some discussions include bonuses/incentives to service members with fewer than 20 years of service to separate early and avoid paying full retirements.  Will current service members receive the same retirement benefits in 20-30 years as current retirees?  Or will my generation of military veterans see lower benefits than previous generations?

I've done the math, and at my age, I will need to save an average of $50,000 per year (2010 USD value) for the next 25 years to retire "comfortably."  And by comfortable, I assume Social Security is gone, medical insurance costs increase with inflation (likely they will be higher), and I am able to live off of 50% of my previously earned disposable income levels.

Saving $50,000/year is not easy.  For most families, it definitely means dual incomes and a very strict savings/investment plan.  So my advice to everyone out there, especially younger Americans, is to SAVE, SAVE, SAVE.  Figure out the bear minimum you can survive off of, and do not overextend yourself with debt.  The sooner you pay off your debts and get your savings/investments producing interest income to supplement your income the better.  It can be done, but it will require our generation to be disciplined and smart when it comes to our finances.

Good luck everyone.  Assume the worse, and hope for the best.

Great Daily Show Episode on Lehman Brothers Fraud

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Click On Jon To Watch This Episode

Starting a Business - Ideas for Capital

Have you ever thought about taking that big leap and starting a business?  Do you already own your own business, but you need some capital to bring your vision to fruition?  Whether you need $1,000 or $1,000,000 this little thread can help you figure out some next steps.

For the sake of keeping this short and sweet, let's assume you've already researched SBA loans, business lines of credit, and spoken with your personal banker about getting a business loan.  My goal, in this thread, is to share my thoughts on some of the ways you can get financing, outside of speaking to your banking institution.

Remember The 3 F's.  FRIENDS - FAMILY - FOOLS!

Starting, managing, running, and growing a business is NOT easy.  But, if you are passionate about what you do, you can make it work.  I do not use the word passionate lightly.  If you do not have a passion for your own business, STOP READING NOW!  I will assume those readers stopped and went on to careerbuilder or monster to find a new career.

Now, for you passionate entrepreneurs, let's tackle the 3 F's.  Friends, Family & Fools.  Yes, these resources can be your best source for getting capital into building the business of your dream.  You will be surprised to find out which of your friends, and who in your family, share an entrepreneurial spirit with you.  The risks are high with any investment, and doing business with friends and family has its pro's & con's.  But, they can also be a great source of support, brainstorming sessions, and yes CAPITAL.  Talk to your network, let them know what you are trying to do, and always remember to act like a professional, even if you are getting capital from a "fool." ;-)

If you tap out the 3 F's, look into the following:  Venture Capital & Angel Investors.  After you search these key words, make sure to research "Venture Forums."  Most city business chambers have resources available to small business owners, so make sure you take advantage of them.  Just make sure you have a solid business plan ready, professionally bound with non-disclosure agreements, pro-forma statements, references, and resumes for key executives in your business.  Don't forget to include influential adviser's that you can call upon for advice.

Last note, if you are a military veteran, make sure to research unique options that may be available to you.  The Patriot Express Loan is one example of special funds that may be available to you.  They carry higher levels of government guarantees, which lowers the lenders risk of giving you a loan.  Basically, the government is willing to guarantee a higher percentage of your loan, and that makes you a prime candidate in the banks eyes as you lower their risk.

Good luck business owners!  Feel free to post comments on other useful resources that may be available for entrepreneurs like yourself.

Shorting Stocks? What Is A Short Sale?

I remember hearing investors talk about "shorting" a stock a few years ago, but I never understood what they were talking about.  Shortly thereafter, I was finishing up some finance classes in college when we came across the "short sale" topic.  I've had friends ask me about this a few times, so I figured I would put a very simple explanation of this on the blog.

In the simplest terms, short selling a stock is a bet against the stock.  If you believe that a stock is overpriced, and due to decline in value, then you would short the stock.  You are betting against the firm's stock price.  For example, let's assume you look at a stock with a price of $100/share.  You have a gut feeling that the firm is going to have a bad quarter, and you believe the stock is going to drop down to $70/share.  Well, in this case, you would not want to buy the stock at $100 if you believed that you would lose 30% in value, but you would want to "short" the stock.

What happens next is the interesting thing.  Let's say you commit to buying 1,000 shares that you believe will be selling for $70/share in the next month.  If the stock drops in value, great, you buy the 1,000 shares at the lower price and you profit from the difference.  But, if the stock goes up to $200, you are forced to purchase the 1,000 shares at the higher price.  See the risk involved?  There are certain protections you can look into when dealing with short selling stocks, but I will simply tell you to contact a financial representative for more details if you are a novice investor interested in short selling.

The reason you commit to buying the 1,000 shares, is due to the fact that you are temporarily borrowing the 1,000 shares at $100/share.  In essence, you start the process by borrowing the shares, collecting the 1,000 shares at $100/share (that calculates to be $100,000), then you later return these shares for the profit or loss.  If the stock goes down to your target price of $70/share, you then purchase these shares (at a cost of $70,000), return the 1,000 shares that you borrowed, and walk away with $30,000 in your pocket.  Simple right?

Buyer beware, if that stock prices goes up, you are stuck paying that difference.  With any investment, there is always a risk involved, so be cautious.

Last note:  Should investors, brokers, and firms be scrutinized for profiting off short sales?  Some people tend to believe that the entity betting against a firm must have known something ahead of time.  Examples:  "Why did you short the stock?  Did you know in advance that the mortgage-backed securities were worthless, so you bet against them?  Why didn't you warn the general public or SEC?  If you knew the firm was struggling, you should have told everyone!"

There are plenty of arguments to support and defend short sales, but I will leave the ethical discussion of short selling to your next cocktail party :-)

Retirement Planning Ideas and Pension Discussion

I read an article last month, and I will post the link if I can find it again, but it said that less than half of all American adults have at least $10,000 saved for retirement.  That means that 50% of American families are not even close to being eligible for retirement.  Now I know these numbers can be skewed in one direction or another, but the idea of "retirement" is one that will haunt the generations to come.

Will I have enough to retire?  With the average life expectancy increasing, how will that effect my retirement planning?  Do I need to save $500K, $1mil, $2mil+?  Will my pension go away like so many others we have seen over the past few decades?  I thought my home would be my source of retirement, but I currently owe more than its worth and I'm already 60 years old, what should I do?

There is no simple answer for everyone.  Let's face it, some people like lavish lifestyles, and others don't mind living in a tent :-)  The first decade of 2000 gave American's, and the rest of the world for that matter, a unique perspective of both economic booms and economic depressions.  With that said, most adults that lived through these trying years have already realized that something needs to change if they are going to retire in their lifetime.

The younger generations, those with 30+ years left of working before they reach retirement ages, will have plenty of time to start saving and planning for retirement.  Doesn't mean they will all follow a strict "save 20% of the paycheck" philosophy, but we are most likely going to see a change in the type of jobs people choose and locations to live as younger generations try to apply these new life lessons.  "We've seen our parents lose their retirements, their home equity, and their jobs... how can I avoid all of that happening to me when I'm there age."  These are questions I ask myself all of the time, and I can sense a quiet movement in my generation to avoid these same results.

One thing facing millions of workers, is the threat of bankrupt pension funds.  The trend suggests that pension funds are a thing of the past.  In the coming years, we are likely to see more state and federal pension funds come under pressure to change as the funds struggle to meet payments to retirees, who are naturally living longer than normal.  I fear some government employees, and possibly even military veterans in later decades, will face some kind of decrease in retirement benefits as these funds continue to come under pressure and scrutiny from financial experts.  I think it is absolutely wrong to promise any individual a defined retirement benefit, have them give up 20-30+ years of service only to take some or all of  that away in the end.  It's sad, it's wrong, and unfortunately we are going to see more of this in the future.

Jake's Simple Advice:

• My only simple advice is to SAVE, SAVE, SAVE!  At least 20% of your income per year.


• Live within your means and find ways to cut out lavish expenses.


• Don't invest in real estate where your mortgage is more than what your rent would be.


• Understand the "Time Value of Money" (TMV) & how it will affect your retirement (i.e. $1 in 1950 is not the same as $1 in 2000).


• Talk to a financial advisor, and setup your own retirement funds (i.e. ROTH IRA, Traditional, SEP etc.)  Do not expect your employer or government to take care of you.


• Vehicles are depreciating assets, don't buy luxury brands for the image value, it only loses value.


• Set a monthly budget, adjust quarterly, but stick to that budget.  Here's a simple method to stay on track, if your budget is $5,000 per month of expenses (rent, mortgage, food, dining out, gifts etc.), deposit $5,000 into your operating account on the 1st of the month.  You can have all of your income deposited into a savings/money market account, and make 1 transfer per month, regardless of how much you make.  If you make $10K/month, but your budget is $5K per month, then you save $5K per month!  Stay committed, stay dedicated, & stay on track.


• Figure out what you can live off of, and avoid increasing that amount year-after-year.  A 10% pay increase should not equate to 10% more to spend on "stuff."


• Take advantage of interest NOW!  If you have large amounts of money in a savings account, say $10K+, you need to move money around, especially if you are only getting 0-2% interest.  Remember, TMV, inflation averages 3% per year over the long-haul, which means you are already losing money at 2%.  Get yourself some CD's, Money Market Accounts, Mutual Funds etc.  Talk to your financial advisor.

Simple Idea for Green Business Cards

Here is a simple idea created by my broker Trish. We have an eco-friendly real estate brokerage, and what better way to advertise ourselves than with our new green business cards. Trish came up with the idea to use old cereal boxes, cut them up into business cards, then print or stamp the logo, genius!

See photo below:

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Fix The Mortgage and Real Estate Crisis

The reviews are in, and making homes affordable is not working.  Banks are dragging their feet, and homeowners are living with the stress of the unknown for months if not years.  Plus, short sales are a mess.  The second lien holders are holding up the sale, trying to get payments off the HUD and/or simply denying homeowners from a solution to their problem.  The list goes on and on.

So what needs to be done?  Here we are in the 1st quarter of 2010, and foreclosure filings are still at an all time high!  The government just re-launched new guidelines trying to entice banks into accepting short sales with a cash incentive to homeowners, but its likely to be just as successful as the MHA program...

The fact is, right now it makes sense for some homeowners to let their property go.  Especially those facing large deficits in their loan to value ratios.  For example, a homeowner in Orlando may owe $300K for a home that would not appraise for more than $150K today.  If there was ever a time to let the home go to foreclosure or short sale, it would be now.  Get rid of the negative cash flow and avoid 30+ years of payments and move on with a new financial strategy.  I am not saying this as a "how-to" or advice as to what homeowner's should do, but more as a head's up to the industry as a whole.  How can we fix real estate when factors like this are leading the wave?

Answer:  there is no simple answer.  Good borrowers will continue to weigh the pro's and con's, and as values continue to struggle in finding a bottom, more homes will enter the foreclosure process.  In most scenarios, it makes more financial sense.  Plus, due to the bail-outs, it is socially more acceptable today to allow your home to enter foreclosure than ever before.

The main problem is the artificial inflation homes experienced in the last decade, and the fact that banks/investors loaned money on this artificial equity.  Who should suffer more, the investor or the homeowner?  The debate could go either way.  After all, the mortgage note is simply a contract for the homeowner to turnover the deed if they default on the payments... but banks don't want the negative equity property.

Unfortunately, those that continue to hold properties that were financed at the peak (100% LTV) will most likely have 5+ years of wait time before they see values reach loan amounts.  Some areas are better and worse than others, but patience will be required for most of the people looking to hold through these tough times.

My advice:  residential loans should follow similar underwriting to commercial loans, by taking out the emotional side of valuing a home.  Look at "what the home would rent for" and the mortgage should be at or near that level.  When you allow emotional valuations to resume, as a bank, you have to assume the risk of default and be willing to accept the loss.